Impact of Infrastructures and ICT on Economic Growth: Measurement Issues

1. Infrastructures and ICT. Measurement Issues and Impact on Economic Growth Matilde Mas Universitat de València & Ivie OECD Workshop on Productivity Analysis and Measurement Bern, 16-18 October 2006

2. OBJECTIVE OF THE PAPER • The measurement of the impact of ICT and Infrastructures on Economic Growth • Using a growth accounting framework • Previous step: address the measurement problem posed by the presence of publicly owned assets (such as infrastructures) Illustration: Spain as an example

3. TWO POINTS OF DEPARTURE: • The Infrastructure´s debate of the late eighties and early nineties. A growth and convergence debate • The ICT revolution of the late nineties and the beginning of the new century

4. TWO POINTS OF DEPARTURE: Infrastructures: • Responsible of the US productivity slowdown of the ´70s and ´80s • Engine of growth in the European countries • Factor lying behind the lack of convergence of per capita income (as in the case of the Spanish regions and provinces) ICT capital (production and use) as source of: • US productivity upsurge • EU (including Spain) poor productivity performance

5. INFRASTRUCTURES: MEASUREMENT ISSUES

6. INFRASTRUCTURES: MEASUREMENT ISSUES • Infrastructures are mainly provided by the public sector. • National Accounts do not assign a net return to the flow of services provided by public capital. • The only recognized flow is public fixed capital consumption

7. INFRASTRUCTURES: MEASUREMENT ISSUES Implications: • NA Gross Operating Surplus figures are underestimated because the value of the capital services provided by public capital is not fully considered. • Consequently, the value of output is also underestimated in NA figures, afecting both its level and rate of growth

8. INFRASTRUCTURES: MEASUREMENT ISSUES • If the standard (endogenous) approach is used when computing the rate of return, 1 & 2 will have consequences on: • the user cost; • the input shares; • the growth accounting results

9. INFRASTRUCTURES: MEASUREMENT ISSUES • According to NA practices: GOS = GOS (private)+Public Capital Consumption • From an analytical perspective: GOS (private) = Value of private capital services

10. INFRASTRUCTURES: MEASUREMENT ISSUES • Standard computation of the internal rate of return: • An Alternative: Revised computation (referring only to the private sector)

11. INFRASTRUCTURES: MEASUREMENT ISSUES Applying Nordhaus (2004) basic principle for measuring non-market activities: “Non-market goods and services should be treated as if they were produced and consumed as market activities…the prices of non-market goods and services should be imputed on the basis of the comparable market goods and services”

12. INFRASTRUCTURES: MEASUREMENT ISSUES • Revised Gross Operating Surplus (including the value of public capital services): • Revised Nominal Value Added (including the value of public capital services):

13. INFRASTRUCTURES: MEASUREMENT ISSUES • Capital shares Standard Approach • Capital shares Revised Approach:

14. THE DATA

15. THE SPANISH DATA • GFCF available for 18 assets, of which: • 3 ICT assets (hardware, software, communication) • 6 types of infrastructures (roads, railways, airports, ports, water & urban infrastructures) And 43 branches of activity, of which: • 15 manufactures • 23 services

16. Treatment of Infrastructures in Spanish Capital Stockestimates. An illustration • Recording of year t investment in infrastructures

17. IMPLICATIONS OF THE TWO APPROACHES Spain as an example

18. IMPLICATIONS OF THE TWO APPROACHES • On GVA and GOS levels

19. IMPLICATIONS OF THE TWO APPROACHES • On GVA rate of growth

20. IMPLICATIONS OF THE TWO APPROACHES • On capital rate of growth

21. IMPLICATIONS OF THE TWO APPROACHES • On capital output shares

22. ICT AND INFRASTRUCTURES Results from a growth accounting perspective

23. ICT and Infrastructures. Results

24. ICT and Infrastructures. Results

25. ICT and Infrastructures. Results

26. SUMMARY AND CONCLUDING REMARKS

27. SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS • The paper identifies a methodological problem in the growth accounting framework arising from the way public assets are treated by National Accounts. • It proposes an alternative approach to computation of the internal rate of return. • The standard (endogenous) approach, does not take into account the full value of the capital services provided by publicly owned goods. • In contrast, the revised approach proposed here computes the internal rate of return for the private sector of the economy. • And, following Nordhaus principle, it is used to estimate the value of the capital services provided by public capital.

28. SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS Implications (taking Spanish data as reference) • GVA figures provided by NA are underestimated by 5%-6% and Gross Operating Surplus by aprox. 15%. • The share of capital services on total output is around 3.5 percentage points higher when the value of public capital services is fully included (as proposed by the revised approach) • However, the growth rates of both, GVA and the Volume Index of Capital Services are not significantly affected.

29. SUMMARY AND CONCLUDING REMARKS 1. ON MEASUREMENT PROBLEMS Implications (taking Spanish data as reference) • Neither ICT capital services share on total output nor the aggregate rate of growth of these types of assets are practically affected by the use of any of the two approaches. • As a consequence, the contribution of ICT assets to the growth rate of labor productivity does not seem to depend on the chosen methodology. • However, the contribution of total capital and TFP is (though modestly) affected.

30. SUMMARY AND CONCLUDING REMARKS 2.ICT and Infrastructures impact on growth The impact of an asset on the rate of economic growth depends on two factors: its share on total output and its own rate of growth. On the shares • The share of ICT capital services on total output has been slightly lower (around 0.04) than that of infrastructures (around 0.05-0.06). • Under certain assumptions (CRS, perfect competition, optimizing behavior) these shares measure the output elasticities of the assets. • Concerning ICT assets, the highest elasticity corresponds to communication and the lowest to hardware, while software is the ICT asset showing the strongest elasticity increase.

31. SUMMARY AND CONCLUDING REMARKS 2.ICT and Infrastructures impact on growth On the shares • The figures for infrastructures elasticities are close to the ones previously obtained for Spain from an econometric estimation of a production function. • Thus, the figures for infrastructures reconcile the results obtained from two alternative strategies, econometric estimation and growth accounting. • However, it also contradicts a previous result for Spain: here the infrastructures elasticity was rather stable along the period while previous (econometric) results indicated a continuous reduction.

32. SUMMARY AND CONCLUDING REMARKS 2.ICT and Infrastructures impact on growth On the growth rates • The rate of growth of total (non residential) capital has been rather strong in Spain (4.5% on average) • ICT accumulation was even stronger (11%) in 1995-2004 although it decelerated to 7.5% in 2000-2004 • Infrastructures rate of growth was less than a third of ICT´s between 1995-2000, but more than a half in 2000-2004.

33. SUMMARY AND CONCLUDING REMARKS 2.ICT and Infrastructures impact on growth As a combination of the two effects: • The contribution of ICT capital has been notable higher than that of Infrastructures. • Office machinery showed the highest contribution, and software the lowest one • Infrastructures contribution was negative in 1995-2000 but it accelerated in 2000-2004. • ICT showed the opposite behavior, decelerating in the second subperiod.